2011 SFC Majority Revenue Forecast Report

8/7/2019 2011 SFC Majority Revenue Forecast Report

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NEW YORK STATE

ECONOMIC AND REVENUE REVIEW

SFY 2011-12

GLOBALINSIGHT

Senator Dean G. SkelosPresident Pro Tempore and Majority Leader

Senator John A. DeFrancisco

Chairman, Finance Committee

Senator Owen H. Johnson

Vice Chairman, Finance

Committee

Robert Mujica

Secretary to the Finance Committee

& Senior Policy Advisor

FEBRUARY 2011


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TABLE OF CONTENTS

EXECUTIVE SUMMARY ....................................................................... 1

THE NATIONAL ECONOMY ................................................................ 9

THE NEW YORK STATE ECONOMY ................................................. 4

REVENUE OUTLOOK ........................................................................... 5

Personal Income Tax ............................................................................ 5

User Taxes ............................................................................................ 5

Business Taxes ..................................................................................... 6

Other Taxes .......................................................................................... 6

APPENDIX Technical Characteristics ..................................................... 6

Prepared by: Mary C. Arzoumanian


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New York State Fiscal Year 2011-12 Economic and Revenue Review

Executive Summary

In conjunction with IHS Global Insight, the Senate Finance Committee reviewed and

analyzed the economic and revenue projections contained within the Executive Budget for SFY

2011-12. Based upon IHS Global Insights February economic forecast, the Senate Finance

Committee projects $438 million in General Fund revenues (inclusive of miscellaneous receipts

and transfers) above the Executive Budget forecast for SFY 2011-12. This amount is reduced

by the estimate for the remainder of SFY 2010-11, which is $23 million less than the Executive

estimate. Therefore, the two year General Fund receipts forecast is $415 million above the

Executive forecast.

The General Fund is not the only fund of the State that receives tax revenues. New York

has a variety of tax revenues that are divided among the General fund, special revenue funds,

capital projects funds, and debt service funds. The revenues deposited into these other funds are

then utilized for targeted spending purposes. In addition, certain tax revenues (e.g. petroleum

business taxes and real estate transfer taxes) are exclusively deposited into these other funds. By

aggregating all the revenues collected by the State in each fund, the Senate Finance Committee

projects All Funds tax revenues to be $422 million above the Executive for SFY 2011-12. This

amount is reduced by the estimate of tax revenues for the remainder of the 2010-11 fiscal year

which is $66 million below the Executive estimate. This results in a two year All Funds tax

revenue forecast that is $356 million above the Executive projection.

IHS Global Insight / Senate Finance Committee Page 1


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The economy at the national level is measured by the Gross Domestic Product, which is

essentially the total amount of goods and services produced and the consumption of these goods

and services. The economy is then divided into three sectors government, business, and the

consumer which are affected by many different variables whose impacts on these sectors

change from year to year. Economic growth is not only dependent upon growth in the each of

these sectors of the economy but, how each sector impacts growth in the other sectors.

Although the economy was recovering from the Great Recession, economic growth was

slow. Real Gross Domestic Product (GDP) grew by 2.9 percent in 2010, up from the 2.6 percent

decline of 2009. Although it benefitted from the first time homebuyers tax credit, signs of

recovery in the housing market expired with the tax credit. State and local governments, whose

spending was supported by the American Recovery and Reinvestment Act, were enacting tax

increases and spending cuts in order to balance their budgets. With job losses mounting

consumer confidence was still down and, as a result, consumers continued to constrain their

spending.

However, there were positive aspects in the economy in 2010. Businesses, after a

significant decumulation in inventories in 2009, were increasing production once again and

corporate profits were starting to grow. With this extra cash on their balance sheets, businesses

increased their capital spending, primarily on equipment and software.

The start of 2011 is showing further economic growth as initial claims for unemployment

insurance are continuing to decrease. As the employment picture brightens, the consumer is

gaining more confidence in the economy and has increased his spending. The economy, as a



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whole, is projected to maintain moderate growth throughout the year. Real GDP for the whole

of 2011 is expected to grow at a rate of 3.2 percent.

At the state level, the economy is measured by the Gross State Product. The state

economy, unlike the national one, has two major sectors consumer and business with

government taking a more supporting role. With the recession significantly impacting the

financial markets, the New York economy was more adversely affected; exhibiting a slower

recovery from the recession than the nation as a whole. Total real GSP grew by 2.1 percent in

2010; economic growth being constrained by the impact of the imposition of $14 billion in new

taxes and fees enacted by the previous administration and the Democrat controlled Senate in the

past two years. Economic growth in New York is projected to continue to lag national

economic growth in 2011; growing by 2.8 percent as compared to 3.2 percent at the national

level.

With the economic recovery, wages and personal income at both the national and state

level have shown growth in 2010. New Yorks wage growth occurring mainly as a result of

increased bonuses paid to the financial services industry in the first quarter of the year. Wages

at the national and state level grew by 2.1 percent and 4.6 percent, respectively, while personal

income grew by 3.0 percent and 4.1 percent, respectively. Growth in personal income in 2011 is

projected to continue to grow at both the national and state levels as a result of the continued

recovery in the economy, both growing by 5.2 percent.

As outlined in the following tables, total All Funds tax collections are estimated at $60.73

billion in SFY 2010-11. This estimate is $66 million below the Executive Budget forecast. For



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SFY 2011-12, All Funds tax revenues are expected to increase by $4.48 billion to $65.21 billion

or $422 million above the Executives projections.

Estimates for the remainder of the current fiscal year show the decline in bonus payments

to the financial services industry that are paid in the fourth quarter and the return to the

previously established schedule of refund payments for taxpayers filing their returns early. IHS

Global Insights forecast of the overall national economy in 2011 is stronger than the economic

forecast presented by the Executive. This is especially apparent in personal income growth

which factors into the States personal income tax collections. The forecast for the State

economy in 2011 appears to be stronger than that of the Executive as well.

Although the forecast exhibits stronger revenue growth for the upcoming fiscal year

based on the projection of stronger economic growth, there are both upside and downside risks

associated with the forecast, as with any forecast. The housing market, with its continued

decline in home prices and weak home sales, as well as the potential for the recovery to remain a

jobless recovery can have a negative impact on the States revenues. On the positive side,

increased investment by businesses and stronger consumer confidence would have a positive

impact on sales tax and personal income tax receipts. Additional revenues realized by the State

should support the States reserve funds or be used to support state and local tax relief.



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SFY 2010-11 General Fund Tax Collections(Millions of Dollars)

Senate

Finance

Executive

Budget VariancePersonal Income Tax 23,593 23,624 (31)

Withholding 30,721 30,776 (55)

Estimated Payments 9,752 9,751 1 Final Returns 2,021 1,967 54 Other Payments 1,023 1,091 (68)

Gross Collections 43,517 43,585 (68) Refunds 7,660 7,686 26 STAR 3,300 3,300 0 RBTF 8,964 8,975 11

User Taxes and Fees 8,750 8,775 (25) Sales and Use 8,036 8,063 27 Cigarette/Tobacco 486 484 2 Alcoholic Bevera e 228 228 0

Business Taxes 5,619 5,664 (45)

Corporate Franchise 2,777 2,848 (71)

Corporate Utilities 636 634 2 Insurance 1,193 1,191 2 Bank Tax 1,013 991 22

Other Taxes 1,196 1,099 97

Estate and Gift 1,178 1,081 97 Pari-mutuel Taxes 17 17 0 Other 1 1 0

Total General Fund Taxes 39,158 39,162 (4) Miscellaneous Receipts 3,082 3,144 (2) Transfers 11,892 11,909 (17)

Total General Fund Receipts 54,372 54,192 (23)



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SFY 2011-12 General Fund Tax Collections(Millions of Dollars)

SenateFinance

ExecutiveBudget Variance

Personal Income Tax 26,011 25,589 422

Withholding 32,072 31,802 270

Estimated Payments 11,042 10,925 117 Final Returns 2,218 2,190 28 Other Payments 991 1,104 (113)

Gross Collections 46,323 46,021 302 Refunds 7,251 7,512 261 STAR 3,293 3,293 0 RBTF 9,768 9,628 141

User Taxes and Fees 9,313 9,153 160 Sales and Use 8,572 8,406 166 Cigarette/Tobacco 518 514 4 Alcoholic Bevera e 223 233 10



Corporate Utilities 639 681 (42) Insurance 1,312 1,266 46 Bank Tax 1,083 1,147 64

Other Taxes 994 1,030 (36)

Estate and Gift 978 1,015 (37) Pari-mutuel Taxes 15 14 1 Other 1 1 0

Total General Fund Taxes 42,310 42,023 287

Miscellaneous Receipts 3,146 3,148 (2) Transfers 11,985 11,832 153

Total General Fund Receipts 57,441 57,003 438



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SFY 2010-11 All Funds Tax Collections(Millions of Dollars)

Senate

Finance

Executive

Budget VariancePersonal Income Tax 35,857 35,899 (42)

Withholding 30,721 30,776 (55)

Estimated Payments 9,752 9,751 1 Final Returns 2,021 1,967 54 Other Payments 1,023 1,091 (68) Gross Collections 43,517 43,585 68 Refunds 7,660 7,686 26

User Taxes and Fees 14,145 14,183 (38) Sales and Use 11,474 11,513 39 Auto Rental Tax 97 95 2 Cigarette/Tobacco 1,623 1,621 2 Motor Fuel Tax 511 516 (5) Highway Use Tax 131 129 2 Alcoholic Beverage 228 228 0 MTA Taxicab 81 81 0

Business Taxes 7,599 7,673 (74) Corporate Franchise 3,159 3,270 (111)

Corporate Utilities 814 836 (22) Insurance 1,331 1,308 23 Bank Tax 1,218 1,184 34 Petroleum Business 1,077 1,075 2

Other Taxes 1,765 1,665 100 Real Estate Transfer 569 566 3 Estate and Gift 1,178 1,081 97 Pari-mutuel Taxes 17 17 0 Other 1 1 0

Payroll Tax 1,360 1,372 (12) Total All Funds Taxes 60,726 60,792 (66)



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SFY 2011-12 All Funds Tax Collections(Millions of Dollars)

SenateFinance

ExecutiveBudget Variance

Personal Income Tax 39,072 38,509 563

Withholding 32,072 31,802 270

Estimated Payments 11,042 10,925 117 Final Returns 2,218 2,190 28 Other Payments 991 1,104 (113) Gross Collections 46 323 46 021 302 Refunds 7,251 7,512 261

User Taxes and Fees 15,042 14,810 232 Sales and Use 12,186 11,950 0 Auto Rental Tax 104 102 2 Cigarette/Tobacco 1,799 1,786 13 Motor Fuel Tax 516 518 2 Highway Use Tax 128 140 (12) Alcoholic Bevera e 223 233 10 MTA Taxicab 86 81 5



Corporate Utilities 837 892 (55) Insurance 1,443 1,392 51 Bank Tax 1,267 1,342 75 Petroleum Business 1,122 1,116 6

Other Taxes 1,584 1,650 (66)

Real Estate Transfer

590

620

37 Estate and Gift 978 1,015 (30) Pari-mutuel Taxes 15 14 1 Other 1 1 0

Payroll Tax 1,432 1,437 (5) Total All Funds Taxes 65,206 64,784 422



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The National Economy

The national economy as a whole is measured by the Gross Domestic Product (GDP).

GDP is essentially a combination of all the goods and services produced and consumed by the

three sectors of the economy: the consumer, business, and government. These three sectors

then utilize various inputs from the economy, such as interest rates and inflation, to make their

spending and policy decisions. How these sectors interact with each other and react to the ever

changing inputs of the economy form the basis by which the economy either expands or

contracts. For example, the amount of income affects how much the consumer will spend.

Increases in consumer spending translate into corporate profits for the business sector who then

utilize such profits to make capital investments and hire new workers. Increases in both these

sectors translate into increased tax revenues for the government sector; allowing for budgetary

spending growth and/or tax relief.

Figure one shows how much each sector contributed to the national economy from the

beginning of the recession through the current recovery. As shown, the consumer is the biggest

contributor to the economy and his contribution to GDP changes little over the six year period.

Business is the second largest contributor to the economy. Even though its share pales in

comparison to the consumer, the business sector is as important a contributor to the economy as

it drives employment and wages which, in turn, spur consumer spending.



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0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

2007 2008 2009 2010 2011

Figure 1

Composition of GDP

Consumer Business State & Local Federal

Government, through its own spending habits, also plays a significant part in the

economy; state and local government spending contributing more to GDP than Federal

spending. The Federal governments role expanded throughout the recession as both monetary

and fiscal policies were employed to spur economic growth. However, the contribution to GDP

by state and local governments declined as the recession took its toll on tax revenues.

Review of 2010

The longest economic downturn since the Great Depression, now considered the Great

Recession, officially ended in June 2009. However, the economic recovery has been extremely

slow. Buoyed by the American Recovery and Reinvestment Act (ARRA) that was enacted in

the first quarter of 2009, the economy began exhibiting positive growth. As shown in figure

two, strong growth occurred in the second half of 2009 as the fiscal stimulus from ARRA made

its way through the economy. As the provisions of ARRA expired, economic growth slowed.



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In addition, the solvency of some foreign economies became questionable, causing shockwaves

in the financial markets. For all of 2010, the national economy, as measured by real GDP, grew

by 2.9 percent.

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2007:1 2008:1 2009:1 2010:1 2011:1 2012:1

PercentageChange

Figure 2

Real GDP Growth

By employing both monetary and fiscal policy throughout the recession, the Federal

government contributed to the economic recovery. With its monetary policies of maintaining

the Federal funds rate at close to zero percent and its injection of liquidity into the financial

markets with the Troubled Asset Relief Program (TARP), the Federal government served to

loosen the credit markets; keeping interest rates on loans low and financial institutions solvent.

Under the American Recovery and Reinvestment Act (ARRA), the federal government

increased its spending on state and local governments to provide them with budget relief. In



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addition, tax cuts were enacted in order to put money in the hands of consumers and businesses

to increase their spending. As shown in figure three, the Federal government was the only

sector to increase its spending during the recession.

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2007 2008 2009 2010 2011

Expenditure Growth

Consumer Business Federal State & Local

GOVERNMENT SPENDING AND INTERVENTION

Depending upon the state of the economy, the amount that government contributes to

GDP varies widely. As mentioned above, the Federal government contributed to the economic

recovery. With the buildup of troops to employ the surge in Iraq and the focus shifting to

Afghanistan, defense spending grew significantly in 2008, increasing by 7.5 percent. Over the

next two years, defense spending continued to grow but, at slower rates than in 2008.

Prior to the recession, non-defense spending had declined. However, as the recession hit

and the financial markets collapsed, non-defense spending grew as a result of increased



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spending on Social Security and healthcare as well as the employment of fiscal policy through

the Troubled Asset Relief Program (TARP). TARP authorized the Federal government to

purchase assets and securities of the countys financial institutions in order to maintain their

solvency. With the continued impact of the recession in 2009, spending on entitlement

programs continued to contribute to increased spending. In addition, the American Recovery

and Reinvestment Act (ARRA) was enacted which primarily provided additional funding to

state and local governments although some fiscal relief was given to businesses and consumers.

As a result, non-defense spending grew by 6.5 percent.

-2.0

-1.0

0.0

1.0

2.03.0

4.0

5.0

6.0

7.0

8.0

2006 2007 2008 2009 2010 2011

Percentag

eGrowth

Figure 4

Real Government Spending

Defense Non-Defense State & Local

With the slow economic recovery in 2010 the housing market was still depressed and

jobs were still being lost non-defense spending continued to grow at the same pace as it had in

the past two years. In addition, some of the provisions from ARRA were extended, primarily

relief for state and local governments.



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Although spending by state and local governments accounts for a larger share of GDP,

its contribution to economic growth varies widely due to resources being more limited than

those at the federal level. The primary limitation is that state and local governments cannot

deficit spend like the federal government. State and local government spending is dependent on

the economic growth which is manifested through the amount of tax revenues collected.

However, there is a lag in the collection of some state tax revenues, especially in relation to the

filing of personal income tax returns. As a result, even though the economy slowed down in

2007, state and local government spending increased by 1.4 percent. As the recession deepened

in 2008, tax collections were negatively impacted and spending only grew by 0.3 percent. By

2009, state and local governments realized significant declines in their revenues. Even with the

fiscal relief provided by the Federal government under ARRA, spending decreased by

approximately one percent.

With the economy slowly recovering in 2010, state and local governments were not

realizing significant growth in their revenues. With the expiration of the ARRA provisions that

boosted their spending, state and local governments were now relying on tax increases as well as

spending decreases to balance their budgets. As a result, spending declined by another 1.3

percent in 2010.

Along with government spending impacting economic growth, government policies are

used to attempt to influence the overall economy, whether it be to stimulate spending or to

control inflation. Although the economy is cyclical in nature, the government tries to ensure

that the economy does not expand too quickly thus causing inflation to spin out of control or



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to slow down too quickly thus causing a recession. There are two mechanisms by which

government intervenes in the economy fiscal policy and monetary policy.

Fiscal policy entails directing the economy through tax policy or through government

spending. When the Federal government, or state and local governments, lower taxes, more

money is put into the hands of the consumer and business to spend as they wish. During the

most recent recession, the federal government used a combination of tax cuts and government

spending through ARRA to administer fiscal policy. In 2010, the federal government continued

using fiscal policy by extending the homebuyers tax credit and extending the enhanced

reimbursements received by states through the Federal Medical Assistance Percentages

(FMAP). At the end of 2010, the tax cuts that were enacted as part of the Economic Growth and

Tax Relief Reconciliation Act under the Bush Administration were extended for two more years.

Monetary policy, under the control of the Federal Reserve Board, entails the

manipulation of interest rates which impacts the money supply. One of the ways that the Fed

manipulates rates is through the interest rate on Federal Funds which is the rate used when banks

loan money to each other. The Fed Funds rate then becomes a basis upon which banks then set

their own loan rates such as mortgage rates and personal loan rates. When the economy is slow,

the Fed will decrease interest rates to reduce the cost of capital in order to spur spending by

consumers and businesses; thus boosting the economy. However, if the Fed thinks the economy

is growing at too fast a pace and inflation is too high, it will increase interest rates to slow down

spending and encourage saving.



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During the recession of 2001, the Fed reduced the Federal Funds rate to one percent in

order to spur economic growth. Over the course of the next seven years, the Fed gradually

increased rates as the economy recovered and the economic expansion took hold.

At the beginning of 2007, the Federal Reserve had taken a wait and see attitude with

regards to interest rates. The economy slowed, but not significantly, and it seemed that inflation

was in check. As a result, the Federal Funds rate was maintained at 5.25 percent through the

first half of the year. However, as the problems with the subprime mortgage market continued

to mount during the summer and the financial markets became increasingly volatile, the Federal

Reserve reversed its policy and reduced interest rates.

As the recession deepened, inflation was no longer an issue for the Fed. Instead, its

concern was calming investors fears and loosening the credit markets to allow money to flow

through the economy. As shown in Figure 5, the Federal Reserve reduced the Fed Funds rate by

approximately 400 basis points over the course of 2008.



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0.00

1.00

2.00

3.00

4.00

5.00

6.00

2007:12007:22007:32007:42008:12008:22008:32008:42009:12009:22009:32009:42010:12010:22010:32010:4

Figure 5

Federal Funds Rate

By the beginning of 2009, the Federal Reserve set its Fed Funds rate within the range of

zero and 0.25 percent. With the slow economic recovery, the Fed has maintained this range

throughout 2009 and 2010.

Along with reducing the federal funds rate, the federal government used monetary policy

through what has been called Quantitative Easing. This program, also known as the Troubled

Asset Relief Program (TARP), allowed the U.S. Treasury to purchase mortgage backed

securities from various financial institutions across the country. The securities that were

purchased were bonds backed by mortgages or assets that became illiquid as a result of the

collapse of the subprime mortgage market. By purchasing these securities, the Treasury

provided liquidity, in the form of money supply, into the marketplace as well as improving the

bottom line of the financial institutions. Due to the hesitancy to give out loans on the part of

banks, increased liquidity allowed financial institutions the ability to make new loans to spur



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spending growth. The Federal Reserve also purchased Treasury bonds to inject additional

money supply into the market and to keep interest rates low.

FINANCIAL MARKETS

With the bursting of the housing market bubble and the crisis in the subprime mortgage

market, the financial markets were significantly impacted. Not only did financial institutions

curtail their lending to businesses and consumers, they curtailed their lending to other banks.

Prior to the credit crisis, the London Interbank Offered Rate (LIBOR), the rate at which banks

loan money to each other, did not deviate significantly from the interest rate on treasury bills;

LIBOR rates ranged from 20 to 50 basis points higher. As the credit crisis took hold, the spread

between these interest rates widened. Banks were less likely to loan money to other banks and,

if they did, charged more in interest to do so. As the Federal government implemented the

TARP program to buy assets of troubled financial institutions, the spread narrowed once again,

as shown in Figure 6.

0.43% 0.48%

0.92%

1.53%

0.54%

0.21% 0.19%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0.0%

0.2%

0.4%

0.6%0.8%

1.0%

1.2%

1.4%

1.6%

2005 2006 2007 2008 2009 2010 2011

InterestRate

InterestRateSpread

Figure 6

Interest Rate Spread

Spread LIBOR T-Bill



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Investors preferred to buy safe assets such as Treasury bills and bonds. Buyers of

municipal and corporate bonds purchased only highly rated bonds; imposing high premiums on

the lower rated ones. With the flight to safety during the credit crisis, investors increased their

purchases of treasury bonds while the amount of corporate and municipal bonds being sold

declined. The Federal Reserves policy of quantitative easing also caused the issuance of

treasuries to grow exponentially, as shown in Figure 7. With the creation of the Build America

Bond program to allow municipalities wider access to the bond markets, municipal bond

issuances grew in 2009 and 2010.

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

2005 2006 2007 2008 2009 2010

BondSales

Figure 7

Bond Issuances

Corporate Municipal Treasuries

Source: SIFMA

The equities markets were negatively impacted by the recession as well as well as the

bond markets. By the end of 2008, the S&P 500 declined by approximately 600 points from its

peak in 2007. During the first quarter of 2009, the stock market continued to decline; the S&P



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500 falling by an additional 100 points. As the financial market crisis waned and the recession

came to an end, the stock market started to increase in value. With uncertainty surrounding the

economic recovery, growth in the stock market was equally uncertain. By the end of 2009, the

S&P 500 gained 179 points.

As the recovery continued into 2010, the stock market continued to grow, increasing by

approximately 21 percent. However, the stock market maintained its previous volatility as

concern over debt levels in certain European countries came to the forefront.

500

600

700

800

900

1000

1100

1200

1300

1400

1500

S&P500Index

Figure 8

Stock Market Growth

BUSINESS

The focal point of the decline in business spending during the past recession was not only

the impact on the financial markets as a result of the credit crisis but, also the large inventory

decumulation that took place. With the economy slowing down in 2007, businesses sensed that



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they did not need to increase their inventories at the same pace as they had in the previous years.

As the recession deepened in 2008, decreased household wealth and the very real prospect of

unemployment caused the consumer to tighten up his purse strings and decrease consumption.

With no demand for their goods and services, businesses found that they needed to expend their

current inventories and decreased production.

By the time the recession ended in June 2009, inventory decumulation had reached its

highest levels; inventories declining by almost $162 billion. Even though the economy was

exhibiting signs of recovery in the second half of 2009, businesses remained skeptical and were

not increasing their inventories.

By 2010, businesses realized that they would have to rebuild some of their inventories as

the economy started to grow again. As a result, decumulation turned into inventory

accumulation. However, businesses were still cautious; rebuilding their inventories at a slower

rate.



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-200.0

-150.0

-100.0

-50.0

0.0

50.0

100.0

150.0

Billionsof$

Figure 9

Real Change in Inventories

With decreasing inventories and a tight credit market, businesses saw no reason to make

any capital investments. In addition, the housing market downturn served to depress any

residential fixed investment. As shown in figure 10, there was no growth in any sector of capital

investment in 2009.

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

2007 2008 2009 2010 2011

AnnualPercentChange

Figure 10

Real Capital Investment

Residential Non-residential Construction Equipment & Software



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Equipment and software purchases by businesses comprises a majority of the investment

spending due the changes in technology and the shorter useful life of equipment. Although

businesses do need to maintain and renovate their facilities, capital investments in facilities have

a much longer life.

Similar to the previous recession, businesses postponed their capital spending. With the

inventory decumulation, businesses could maintain their production with their current

equipment. In 2010, when market conditions indicated that inventories needed to be restored,

businesses realized that they could not do so without making an investment in their equipment.

As a result, equipment and software spending increased by approximately 15 percent.

As previously stated, facilities and their associated capital improvements have a much

longer useful life than equipment. Prior to the recession, when businesses were expanding, they

had a need for additional facility space as well as renovations to their operations. As consumer

demand for their goods and services declined and the workforce shrunk, there was no need for

expanded facilities. Although interest rates were still low in 2010, the economy had not

recovered enough to warrant additional investment in structures; resulting in an additional

decline of 14 percent.

As capital investment by businesses declined, so did their investment in labor. With the

declining inventories, there was no need for the labor to produce these inventories. Therefore,

businesses started to reduce their workforce. Even when the need for inventories returned,



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businesses, while investing in equipment, utilized their existing employees. As shown in the

figure 11, employment decreased significantly in 2009 but productivity increased. The economy

continued to shed jobs into 2010. However, businesses were still getting increased productivity

from their workers.

0.940

0.960

0.980

1.000

1.020

1.040

1.060

1.0801.100

1.120

1.140

124.000

126.000

128.000

130.000

132.000

134.000

136.000

138.000

140.000

2006 2007 2008 2009 2010 2011

OutputperHour

MillionsofPersons

Figure 11

Employment and Productivity

Employment Productivity

The severe economic downturn also impacted business bottom line. Corporate profits

showed double digit declines in 2008. While this decline is attributable to all businesses, the

financial markets realized the biggest decline due to the large decline in the stock market and the

impact of the subprime mortgage collapse.

In 2009, corporate profits fared no better. While not the double digit decline of the

previous year, corporate profits still declined by 0.4 percent. As the financial markets were the



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drivers of overall corporate profit decline in 2008, their profits were an offsetting factor in 2009.

The growth in the stock market and the infusion of federal funds in the form of the TARP

positively impacted their bottom lines.

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2006 2007 2008 2009 2010 2011

PercentageChang

e

Figure 12

Corporate Profit Growth

As the recession ended and the economy began to recover, businesses became more

profitable. In addition, since businesses were realizing increased productivity with less workers,

their profits increased significantly in 2010; corporate profits increased by approximately 29

percent.



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THE CONSUMER

In 2009, the consumer saw both his wages and income decline. Even though businesses

were still not willing to increase employment, wages grew in 2010; increasing by 2.1 percent.

Personal income fared better, growing by three percent, benefitting from stronger growth in

proprietors income.

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2006 2007 2008 2009 2010 2011

Figure 13

Wage and Income Growth

Personal Income Wages

As previously stated, the consumer is the most significant contributor to economic

growth. During the previous recovery, it was the consumer that drove economic growth as

business held close control over its spending. However, as consumers realized a precipitous

drop in their household wealth as a result of job losses and declining home values, they were the

ones keeping tight control over their household budgets; decreasing their spending on all

components of consumption.



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As shown in Figure 14, the recession negatively impacted all sectors of consumption

with the most emphasis on consumption of durable goods as a result of the housing market

crisis. The consumption of these goods was also impacted by the tight credit conditions as most

of these goods are bought with some form of credit.

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2006 2007 2008 2009 2010 2011

GrowthinTotalConsu

mption

GrowthinConsumptionComponents

Figure 14

Real Consumption Growth

Durables Non-Durables Services Total Consumption

Figure 15 illustrates that during the course of the recession, banks were not willing to

make loans to consumers. As the economy recovered, more and more financial institutions

were willing to loosen their credit standards and make more loans. However, with the mortgage

crisis and the reduced personal income, consumers were also not willing to take on additional

debt. Even as more banks were willing to lend in 2010, demand for consumer credit remained

negative.



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-60

-50

-40

-30

-20

-10

0

-60

-50

-40

-30

-20

-10

0

10

20

30

2007:1 2008:1 2009:1 2010:1

IncreasedDemandforL

oans

IncreasedWillingnesstoMa

keLoans

Figure 15

Consumer Credit Conditions

Supply Demand

Source: Federal Reserve Board, Senior Loan Officer Opinion Survery

With the enactment of the American Recovery and Reinvestment Act, the federal

government put created temporary tax incentives to stimulate consumer spending. The Making

Work Pay credit, along with the first time homebuyers tax credit and the sales tax deduction for

new vehicles, restrained the drop in consumption in 2009. As the homebuyers tax credit was

extended into 2010 and the other provisions of ARRA were realized in consumers annual

personal income tax returns, consumption was positively impacted, especially the consumption

of durable goods.

With the economic downturn, inflation, as measured by changes in the Consumer Price

Index (CPI), was not an issue. With the lack of spending by both consumers and businesses,

there was no upwards pressure on prices. In 2009, the economy exhibited deflation as the CPI

declined by 0.3 percent. Historically, the core inflation rate trends lower than the inflation rate



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due to fluctuations in food and energy prices. Due to declines in oil prices in 2009 which held

the inflation rate to below zero, the core inflation rate increased by 1.7 percent. Although oil

prices began to climb again in 2010, businesses were wary about passing on any of their cost

increases to the consumer. As a result, inflation increased by 1.6 percent; core inflation

increasing by one percent.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.04.5

2005 2006 2007 2008 2009 2010 2011

PercentageChange

Figure 16

Inflation

CPI Core CPI

The Consumer Price Index increased by 3.4 percent in 2005, evidenced more by the price

spikes immediately following the hurricanes rather than overall price increases. The Federal

Reserve had been observing these price increases and, as such, started to increase interest rates.

As shown in figure 16, the core inflation rate, had only increased by 2.2 percent at the end of

2005. Inflation continued to fluctuate in 2006, declining in the fourth quarter as a result of a

decline in energy prices. These price declines were short lived and inflation continued in 2007;



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increasing by 2.9 percent. However, as the figure shows, core CPI fluctuated slightly from the 2

percent mark; the standard by which the Federal Reserve measures inflation.

THE GLOBAL ECONOMY

Although it is not a major component of the national economy as measured by GDP, the

global economy does have a significant impact. This impact is reflected not only in relation to

the value of the dollar compared to other currencies but with the strengths or weaknesses of

other national economies. This impact is primarily reflected in the amount of imports and

exports into and out of the United States but, more recently, has been reflected in changes in the

financial markets.

When other national economies are strong, the demand not only increases for their own

domestic goods but, for imported goods as well. This increases the amount of U.S. exports.

Another result of economic strength in other countries is increased competition for resources.

Prices for these resources increase; thus, fueling inflation. This has especially been shown in

relation to oil prices. China, for example, has an increasingly stronger economy whose demand

for energy has grown significantly. That demand causes large increases in oil prices as the

world supply of oil is increasingly limited.

As shown in figure 17, growth in the national economy started to lag the growth in the

economies of our trading partners prior to the start of the recession. As the recession deepened,

the economies in these other countries declined as well although they were still showing

economic growth. By 2009, the global economies were all in decline. Once the recession ended



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and the recovery began, the global economies expanded once again. Since the impact of the

recession was much less severe on emerging markets (other trading partners), their economies

recovered at a much stronger rate in 2010.

(4.0)

(2.0)

-

2.0

4.0

6.0

8.0

2007 2008 2009 2010 2011

PercentageChang

einRealGDP

Figure 17

Global Economic Growth

US Major Trading Partners Other Trading Partners

The value of a nations currency also helps or hinders export and import growth. When

the value of the currency increases, the price of domestic goods increases; making them more

expensive compared to imported goods. Conversely, when the value of the currency declines,

domestic goods become less expensive. When the value of a currency declines, that nation also

becomes more attractive to foreign travelers. Not only are the goods less expensive but services,

such as hotel rooms, are less expensive as well.

As the global recession impacted the global financial markets, dollar denominated assets

became a safe haven for the worlds investors in 2009. In addition, long term interest rates in



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the US were higher than interest rates in its major trading partners. These factors increased the

demand for the dollar causing it to appreciate. With less volatility in the financial markets and

global economic growth, especially in the emerging markets, the dollar depreciated again in

2010.

0.840

0.850

0.860

0.870

0.880

0.890

0.900

0.9100.920

0.930

0.940

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2007 2008 2009 2010 2011

DollarValuation

TradeGrowth

Figure 18

International Trade & Exchange Rates

Exports Imports Exchange Rate

Both US exports and imports declined in 2009, declining by 9.5 percent and 13.5 percent,

respectively. The larger decline in imports was due not only to decreased consumer demand

but also to the inventory decumulation by businesses.

In 2010, both exports and imports grew as the economy recovered, increasing by 11.7

percent and 12.6 percent, respectively. Although exports benefitted from the dollar

depreciation, the growth in imports was attributable to the growth in inventories.



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Outlook for 2011

As 2011 began, the economic recovery seemed to be taking hold. Initial claims for

unemployment insurance were decreasing during the final quarter of 2010 and continued to do

so. Although weekly claims were still showing some volatility, initial claims maintained their

downward trend. In turn, the consumer regained some confidence. The consumer was

loosening his purse strings by the end of 2010, increasing his holiday sales. The stock market

continued its upward trend although the political unrest in North Africa has caused some

concern. As a result of these positive indicators, real GDP is projected to grow by 3.2 percent in

2011.

The Federal government is still utilizing fiscal and monetary policy to sustain this

recovery. At the end of 2010, the Bush era tax cuts (tax cuts that were enacted as part of the

Economic Growth and Tax Reconciliation and Relief Act and the Jobs and Growth Tax Relief

Reconciliation Act) were extended along with a decrease in the payroll tax. In addition, the US

Treasury will employ another round of quantitative easing (currently called QE2) by which it

will purchase up to $600 billion in long term treasuries. QE2 is projected to maintain low yields

on treasuries which would, in turn, decrease interest rates on consumer loans and mortgages that

are tied to those yields.

The Federal Reserve is projected to maintain the Fed Funds rate at its current levels; an

increase not expected until the first quarter of 2012. Inflation is not a concern of the Fed for



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2011. The core inflation rate is projected to be 1.1 percent for 2011, below the two percent

benchmark that the Federal Reserve uses.

0.00

2.00

4.00

6.00

20072008

20092010

20112012

Per

centageRate

Figure 19

Fed Funds Rate and Inflation

Fed Funds Rate Core Inflation

With the Fed maintaining its current interest rate policy as well as the use of QE2,

mortgage rates are projected to stay low; the 30 year fixed rate projected to stay below five

percent. However, the housing market is not projected to be in recovery in 2011. As shown in

Figure 20, the housing market benefitted from the first time homebuyers tax credit that was in

effect from 2009 through the first quarter of the 2010. Once this tax credit expired, home sales

declined. With the continued low interest rate environment, both housing starts and existing

home sales are projected to grow, increasing by 15.9 percent and 2.9 percent, respectively.



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Although the average home price did increase in 2010, this increase coincided with the

tax credit. Once the tax credit expired, home prices fell, once again. Home prices are projected

to remain depressed, declining by 4.9 percent in 2011.

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

2007 2008 2009 2010 2011

AverageHomePrices

StartsandSales

Figure 20

Housing Market Growth

Housing Starts Home Sales Home Prices

As businesses continue to accumulate inventories in 2011 in response to the continued

economic recovery, capital investment will continue to grow by 9.2 percent. This growth is

mainly attributable to the continued growth in spending on equipment and software as

businesses take advantage of the bonus depreciation rules that were extended at the end of 2010.

With the growth in projected housing starts and home sales, residential investment is projected

to grow by 3.2 percent after five years of declining investment. Limiting total investment

growth is non-residential fixed investment which is projected to decline by 2.5 percent.



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With productivity growth flattening out, businesses will find that they need to increase

their investment in the labor market. Employment growth is projected to return in 2011,

increasing by 1.25 percent. This increase in employment will, in turn, reduce the unemployment

rate from 9.6 percent in 2010 to 9.0 percent in 2011. Along with this employment growth, wage

growth is projected to continue, grow at a stronger rate of 4.6 percent.

The consumer will once again take the leading role with spending growth in 2011. With

increased employment and wages, as well as the benefit of the decreased taxes from the

reduction in the payroll tax, the consumer has more money in his pocket for which to spend.

Personal income is projected to grow by 5.2 percent, resulting from strong growth in

proprietors income combined with the strong wage growth.

With more banks willing to make consumers loans as well as some positive signs in the

housing market, consumer spending on durable goods continues to outpace spending on non-

durables and services. Consumption of all goods and services are projected to increase by 3.2

percent for all of 2011.



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Risks to the Forecast

The housing market continues to be a risk for the economy. Home sales are still weak

and there is a large supply of homes on the market. This combined with the continued decline in

home prices erodes the consumers household wealth as well as consumer confidence,

negatively impacting consumption.

With the risk for decreased consumption, businesses would have less demand for their

goods and services, reducing their profits. Without these profits, businesses would be unable to

increase their investments in capital goods as well as in their labor force.

Another risk to the forecast is the political conflicts in Africa and the debt crises in

certain European countries. The political conflicts could impact oil supply, putting upward

pressure on oil prices. Increases in oil prices and their impact on the costs of producing and

transporting goods as well as the impact on the consumers discretionary spending are a major

concern. If inflation as a result of increased oil prices goes beyond the Feds targeted rate, the

Fed may be forced to increase interest rates before 2012 to fend off inflation at the expense of

spurring economic growth.

As a result of the debt crises in the Eurozone, those countries impacted may have to

adhere to fiscal austerity measures which could impact their economic growth. With the



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uncertainty, the financial markets would be impacted as investors turn to U.S. Treasury

securities and away from the equities markets.

With the increased demand for U.S. treasuries, the value of the dollar would increase.

This appreciation in the dollar would have a negative impact on the nations exports. With the

dollar depreciation in 2010 as well as the recovering economy, the nation realized export

growth. By making the price of the nations goods and services more expensive in relation to

other currencies would cause the amount of exports to decline.

A depreciating currency also increases domestic tourism since foreign travelers realize

increased buying power in relation to their own currency. However, a weaker currency lowers

the demand for domestic investment. Foreign investors then require a higher rate of return (e.g.

higher interest rates) to be compensated for the lower value of their investment. A further

depreciation in the dollar accompanied by the projected decrease in interest rates by the Federal

Reserve could reduce this foreign investment.



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United States Economic Outlook(Dollar Figures in Billions of Dollars)

2010 2011 2012 2013

GDP $14,660 $15,331 $15,972 $16,715

Percent Change 3.8 4.6 4.2 4.6Real GDP $13,249 $13,677 $14,701 $14,501

Percent Change 2.9 3.2 2.9 3.1

Consumption Expenditures $9,316 $9,615 $9,863 $10,0482005 Dollars, Percent Change 1.8 3.2 2.6 1.9

Government Expenditures $2,570 $2,558 $2,522 $2,5122005 Dollars, Percent Change 1.1 (0.5) (1.4) (0.4)

Investment Expenditures $1,769 $1,931 $2,097 $2,2952005 Dollars, Percent Change 16.7 9.2 8.6 9.4

Change in Inventories $60 $79 $48 $442005 Dollars, Percent Change 153.4 31.2 (39.6) (8.4)

Exports $1,665 $1,809 $1,967 $2,1352005 Dollars, Percent Change 11.7 8.6 8.7 8.7

Imports $2,087 $2,234 $2,359 $2,4522005 Dollars, Percent Change 12.6 7.1 5.6 3.9

CPI - All Urban, Percent Change 1.6 1.9 1.7 1.9

CPI - Core, Percent Change 1.0 1.1 1.6 1.8

Pretax Corporate Profits $1,622 $1,672 $1,682 $1,735Percent Change 28.9 3.1 0.6 3.2

After-tax Corporate Profits $1,382 $1,194 $1,231 $1,456Percent Change 30.2 (13.6) 3.1 18.3

Personal Income $12,545 $13,198 $13,634 $14,260Percent Change 3.0 5.2 3.3 4.6

Wages and Salaries $6,405 $6,696 $7,027 $7,365Percent Change 2.1 4.6 4.9 4.8

Nonagricultural Employment, Millions 129 131 134 137Percent Change, Seasonally Adjusted (0.7) 1.3 2.0 2.0

Unemployment Rate 9.6 9.0 8.5 7.8

Interest Rates T-Bill Rate, 3-Month 0.14 0.27 1.44 3.39T-Note Rate, 10-Year 3.21 3.42 3.63 4.63

T-Bond Rate, 30-Year 4.25 4.61 4.68 5.03Standard and Poor's 500 Stock Index


Source: IHS Global Insight US Macroeconomic Forecast: February 2011



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The New York Economy

The New York economy is measured by Gross State Product (GSP) and, unlike at the

national level, is primarily composed of two sectors: business and the consumer. State

government plays a lesser role in the New York economy than the Federal government plays in

the national economy. State government adds to growth through its spending and its impact on

businesses and the consumer through its tax policy.

Because of New York Citys position as the financial capital, the housing recession and

the collapse of the subprime market have had a significant impact on Wall Street financial

institutions, particularly those dealing in mortgage backed investment instruments. The poor

performance of these institutions had repercussions throughout the New York economy.

As shown in the following chart, the New York economy took longer to recover from the

recession of 2001 and, as a result, GSP growth lagged GDP growth during the recovery.

However, as the economy strengthened, GSP growth outpaced that of GDP due primarily to

strong stock market performance and corporate profit growth.

As the fallout from the subprime market took its toll on the financial services industry,

the New York State economy experienced a similar slowdown in growth as the national

economy during 2007.



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As the recession deepened in 2008, the New York economy exhibited growth of 0.26

percent where the national economy did not grow at all. However, as corporate profits

continued to decline in 2009 and the stock market was still showing volatility, the New York

economy declined by 4.3 percent. New Yorks economy recovered in 2010, however, at a

slower pace than the nation.

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Figure 21

Economic Growth

GDP GSP

EMPLOYMENT

In 2008, employment in the State as a whole grew by 0.7 percent whereas employment

began to decline at the national level, decreasing by 0.6 percent. Although employment

declined in 2009, decreasing by 2.7 percent, the decline was not as severe as the 4.4 percent

decline in national employment. New York fared slightly better than the nation as a whole in

2010. New York employment decreased by 0.5 percent; national employment decreased by 0.7

percent.



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-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

2007 2008 2009 2010 2011

Figure 22

Employment Growth

New York U.S.

Similar to the national economy, the continued recovery is projected to have a positive

impact on employment in New York; employment is projected to increase by 1.1 percent in

2011. Most industries are projected to have job growth with the exception of the construction

industry which will still be impacted by the depressed housing market. In turn, the

unemployment rate in New York is projected to decrease to 7.8 percent; down from 8.4 percent

in 2010.

Profits earned by Wall Street firms, as reported by the Securities Industry and Financial

Markets Association, realized significant growth during the economic expansion of the last

decade. The decline in employment that had occurred during the recession of 2001 turned into

employment growth for the financial industry. However, as the economy began to slow in 2007,

so did the profits of these firms; employment growth slowed as well. As the credit crisis hit in



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2008, the financial institutions began realizing significant losses. With these revenue losses,

employment in the financial activities sector started to decline, declining by 1.5 percent in 2008.

In the next two years, this sector continued to lose jobs; employment declining by 5.8 percent

and 1.6 percent, respectively.

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

2007 2008 2009 2010 2011

Figure 23

Employment Growth by Sector

New York Financial Services Construction

WAGES

The payment of year end bonuses by the financial services industry plays an important

part in New Yorks wage and income growth. Due to the timing delay of Wall Street bonuses

which are usually paid in the first quarter of the succeeding year, wage growth in New York is

influenced by the performance of the industry in the previous year. Although the financial

markets recorded large revenue losses in 2008 and bonuses that year declined by forty-seven

percent, wages did not exhibit large declines until 2009 due to the timing of the bonus payments.

Similarly, wage growth in 2010 reflected not only the economic recovery but also the increase in



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bonuses from 2009. Wage growth is projected to continue into 2011, increasing by 5.3 percent,

due to the continued economic recovery.

-8.0%

-6.0%

-4.0%-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2007 2008 2009 2010 2011

Figure 24

Wage and Income Growth

Wages Personal Income

HOUSING MARKET

The downturn in the housing market had a different impact in New York than it did on

the nation as a whole. While the State realized declines in both housing starts and home sales

since 2006, New Yorks housing market did not benefit from the first time homebuyers tax

credit. Home sales continued to decline in 2009 and 2010.

Although total housing starts declined in 2006 and 2007, they increased by over ten

percent in 2008. This increase was primarily the result of a large increase in the number of

multi-family housing starts which offset the decline in single family housing starts for that year.

However, that growth was not sustained in 2009, housing starts plummeted by over 70 percent.



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Similar to the experience at the national level, housing starts rebounded in 2010, increasing by

10.1 percent.

-16.0%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

-100.0%

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

2007 2008 2009 2010 2011

ExisitngHomeSales

HousingStarts

Figure 25

Housing Market Growth

Single Family Multi Family Home sales

Average home prices, on the other, did not decline as significantly as they did at the

national level. Average home prices were still increasing in 2007 and began to decline in 2008

but only by 1.3 percent. In 2009, the average home price was relatively flat, decreasing by only

0.3 percent. With the improved economy in 2010, housing prices increased by 0.4 percent,

essentially offsetting the 2009 decline.



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-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

2007 2008 2009 2010 2011

PercentageGrowth

Figure 26

Home Prices

New York U.S.

For 2011, both home prices and housing starts are projected to follow the national trend.

Housing starts are projected to grow by 15.2 percent and home prices are projected to decline by

two percent. However, existing home sales are projected to continue to decline in 2011,

decreasing by 0.9 percent.

CONSUMPTION

Consumption in New York, as measured by retail sales, grew by 5.9 percent in 2010.

With both increased wage and personal income growth, consumers had more money to spend.

This growth was also buoyed by the depreciation in the value of the dollar during the year. At

the national level, tourism spending increased by 11 percent in 2010 as foreign travelers realized

greater buying power as a result of the cheaper U.S. dollar.



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-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

2007 2008 2009 2010 2011

Figure 27

Real Retail Sales Growth

Retail sales are projected to continue to grow in 2011 by 6.0 percent. This growth is a

reflection of the projected growth in personal income as well as employment growth. As the

dollar continues to depreciate, tourism spending is also projected to continue to grow.



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New York State Economic OutlookCalendar Year

(Dollar Figures in Billions of Dollars)

2010 2011 2012 2013

Gross State Product $1,130 $1,180 $1,228 $1,281


Real Gross State Product $1,001 $1,031 $1,059 $1,087


Nonagricultural Employment, Thousands 8,512 8,604 8,767 8,910Percent Change (05) 1.1 1.9 1.6


Personal Income $945 $994 $1,032 $1,079


Wages and Salaries $520 $548 $578 $605


Retail Sales $225 $242 $258 $270


Housing Starts, Thousands 15.9 18.3 27.2 34.9

Source: IHS Global Insight New York State Economic Forecast, February 2011



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New York State Economic OutlookFiscal Year

(Dollar Figures in Billions of Dollars)

2010-11 2011-12 2012-13 2013-14

Gross State Product $1,099 $1,142 $1,192 $1,241

Percent Change -1.3 3.9 4.4 4.1

Real Gross State Product $984 $1,007 $1,038 $1,066


Nonagricultural Employment, Thousands 8,521 8,524 8,647 8,805Percent Change -2,6 0.0 1.4 1.8


Personal Income $919 $958 $1,003 $1,044


Wages and Salaries $505 $528 $558 $586


Retail Sales $213 $229 $246 $261


Housing Starts, Thousands 14.8 16.3 19.8 29.7

Source: IHS Global Insight New York State Economic Forecast, February 2011



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Revenue Outlook

The New York State Senate Finance Committee generates its revenue estimates using

IHS Global Insights forecasts of national and state economic growth. The economic data is

utilized in the New York State Tax Revenue and Economy Model (NYSTREM) an

econometric model developed and operated by IHS Global Insight to generate the

Committees independent revenue estimates. As summarized in the Appendix of this report,

NYSTREM is designed to capture historical and the latest forecast information on the US

economy, the New York State economy, and New York State tax revenues and use that

information to generate a forecast for each State tax revenue stream.

-

10.0

20.0

30.0

40.0

50.0

60.0

Billionsof$

State Fiscal Year

General Fund Tax Collections

PIT Sales & User Business Other

Using the NYSTREM model, the Senate Finance Committee expects gross General Fund

tax collections in SFY 2010-11, excluding the STAR and debt service funds, to increase by 4.8



53/68


percent to $51.5 billion. On an All Funds basis, gross collections are expected to increase by 5.4

percent to $60.7 billion in SFY 2010-11. These increases are primarily the result of stronger

economic growth as the economic recovery took hold.

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

State Fiscal Year

Growth of General Fund Tax Collections

11.0

3.8

(0.6)

(5.6)

4.8

7.7

In SFY 2011-12, the Senate Finance Committee projects that General Fund tax

collections, excluding special revenue transactions, will increase by 7.7 percent to $55.4 billion.

All Funds collections will increase by 6.7 percent to $64.8 billion. This increase reflects the

continued recovery in the economy as well as the full year impact of tax law changes that were

enacted in SFY 2010-11.



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-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%6.0%

8.0%

10.0%

12.0%

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

State Fiscal Year

Growth in All Funds Tax Collections

9.5%

3.6%

(0.9)%

(6.4)%

5.4%

7.4%

Personal Income Tax

Personal income tax collections account for over half of all New York tax

collections and over two thirds of General Fund tax collections (net of reserves). The personal

income tax is imposed on the various types of income a person may receive (e.g. wages, interest

income, dividends, and capital gains). In addition, the personal income tax is imposed on the

income of New Yorks small businesses, such as sole proprietorships, partnerships, and limited

liability companies. This income is subsequently offset by certain deductions as enumerated in

either the Internal Revenue Code or the New York State Tax Law. For SFY 2010-11, total

General Fund personal income tax collections, net of $12.3 billion in reserve transactions, are

estimated to increase by 3.4 percent. This increase reflects wage and personal income growth in

2010 as well as the impact of the temporary rate increase on high income taxpayers in the State.



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In SFY 2011-12, total personal income tax collections, net of $13.1 billion in deposits to the

reserve funds, are projected to increase by 9.0 percent to $39.1 billion. This increase is a result of

continued growth in the economy enhanced by tax law changes enacted in SFY 2010-11.

-

10.0

20.0

30.0

40.0

50.0

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Billionsof$

State Fiscal Year

Gross Personal Income Tax Collections

Withholding Estimated Payments Final Returns Other Payments

PIT Components

The withholding tax and estimated payments are methods by which the taxpayer can

equalize his personal income tax payments over the course of the tax year as opposed to being

liable for one, lump sum payment. When a person receives income, primarily wages, the

appropriate tax is withheld and remitted to the State at that specific point in time. Withholding

tax collections in the current fiscal year are estimated to increase by 4.3 percent to $30.7 billion.

This increase is due to the wage growth that occurred throughout 2010.

The increase in withholding due to wage growth is offset by the decline in Wall Street

bonuses. Withholding collections in the fourth quarter of the fiscal year have historically



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accounted for over thirty percent of total withholding for the year. This is due to the payment of

bonuses by the financial services industry for their performance in the previous calendar year.

However, due to the public backlash over bonuses being paid to financial companies who

received government support through the TARP, many businesses in the industry changed the

method by which bonus compensation is paid; tying such compensation to long term

performance of the company. A larger percentage of bonus compensation is being paid with

stock options by which the recipient must hold the stock for a specified number of years to

exercise the options. Other companies have changed their pay structures to incorporate into

wages what they would have paid their employees in bonuses. As these new compensation

structures are implemented, the level of withholding throughout the year is likely to change.

Withholding collections in SFY 2011-12 are projected to increase by 4.4 percent

resulting from the projected increase in employment and wage growth offset by the expiration of

the temporary rate increase on high income taxpayers at the end of 2011.

Another method by which the State collects the personal income tax throughout the tax

year is through estimated payments. These payments are made when a taxpayer does not pay

the income tax through withholding and/or has a significant amount of non-wage income not

subject to withholding but subject to the personal income tax. These payments are made

quarterly throughout the fiscal year. Estimated tax payments are also made when a taxpayer

requests an extension for the submission of his annual return. These collections are the most

volatile portion of the personal income tax due to the fact that a taxpayer must forecast his tax

liability for the year.



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The most common form of income paid through estimated tax payments is capital gains,

which are incurred through the sale of an asset. Most people associate capital gains with the

stock market. However, as a result of the significant growth in the housing market, the real

estate market was a major contributor to capital gains realizations during the economic

expansion. As the housing market declined, there was less speculation in real estate by investors

which decreased its contributions to capital gains realizations.

Another contributor to the strength or weakness of estimated payment growth is

proprietors income. This type of income includes all the self-employed businesses who earn

their money through their business profits and not through the traditional withholding of wages.

As the economy is projected to improve, proprietors income is improving as well.

As a result of growth in proprietors income of 2.8 percent and growth in the stock

market of 20.3 percent, estimated tax payments are forecasted to be 8.0 percent higher in SFY

2010-11; an increase of approximately $723 million. In SFY 2010-11, estimated payments are

projected to increase by 13.2 percent, to $11.0 billion. This increase reflects personal income

growth in 2010 that is reflected in the extension payments that taxpayers remit as well as growth

in the stock market and proprietors income of 15.8 percent and 6.0 percent, respectively.

Third, the personal income tax is collected through the annual returns taxpayers must file.

The annual return is essentially a reconciliation of a taxpayers taxable income (gross income

less deductions) and taxes paid through withholding or estimated payments throughout the

preceding calendar year. As such, additional tax liability due or refunds are considered the



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settlement of a taxpayers personal income tax. Payments made through the filing of annual

returns are estimated to increase by 7.7 percent in SFY 2010-11. Since final return payments are

based on a taxpayers income for the previous calendar year, this increase is primarily the result

of the imposition of the temporary rate increase that was enacted in SFY 2009-10. In SFY

2011-12, collections from final returns are projected to increase by 9.7 percent, to $2.2 billion.

This increase is due to the strong stock market performance as well as personal income growth

in 2010.

The amount of refunds to be paid to taxpayers is estimated to be 14.3 percent higher in

SFY 2010-11 and 5.3 percent lower in SFY 2011-12. The increase in refunds in SFY 2010-11 is

not only attributable to the decline in personal income that occurred in 2009 but, the delay in the

amount of refunds paid in the fourth quarter of SFY 2009-10. The amount of refunds paid in the

final quarter of the fiscal year is often constrained in order to maintain cash flow between fiscal

years. Due to the advent of electronic filing, there are a larger amount of refunds claimed in the

January to March period. In order to ensure that taxpayers receive their refunds in a timely

manner, the amount of refunds to be issued was increased to $1.75 billion in SFY 2008-09. To

deal with a cash flow crisis in SFY 2009-10, the amount of refunds paid in the fourth quarter

was reduced to $1.25 billion; postponing the payment of $500 million in refunds into SFY 2010-

11. The amount of refunds to be paid in the fourth quarter of SFY 2010-11 was reinstated at the

$1.75 billion level.

For SFY 2011-12, the decline in refunds is due to the return to the refund payment

schedule in the fourth quarter, as stated above, as well as personal income growth in 2010. This



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decline in refunds is also attributable to the deferral of certain tax credits that was enacted as

part of the SFY 2010-11 budget.

Lastly, personal income tax collections are composed of assessments imposed upon

taxpayers as a result of the audit process and filing fees imposed on limited liability companies.

Assessments not only consist of any overdue taxes but the interest and penalties imposed upon

such liability. Other collections are estimated to decrease by 2.1 percent to $1.02 billion in SFY

2010-11. In SFY 2011-12, other payments are projected to continue to decrease by 3.1 percent,

to $991 million. This projected decrease reflects decreased audit receipts.

A portion of income tax collections are deposited to a special revenue fund and a debt

service fund. The STAR reserve is a special revenue fund that receives a portion of personal

income tax collections to reimburse school districts for the reduction in their property tax

collections as a result of the STAR program.

The Revenue Bond Tax Fund (RBTF) is a debt service fund into which twenty-five

percent of personal income tax receipts (net of refunds and the STAR deposit) are deposited.

This fund is used to pay the debt service on the States PIT revenue bonds. Any funds in excess

of the required debt service payments are transferred back to the General Fund. Deposits to the

RBTF are estimated to increase by 3.2 percent in SFY 2010-11. This increase is reflective of

the increase in personal income tax collections during the year. Deposits into the RBTF are

projected to be 9.0 percent higher in SFY 2011-12. This increase is due to higher projected

personal income tax receipts as a result of personal income and wage growth.



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User Taxes and Fees

User taxes, also known as consumption taxes, are what their name implies - taxes on the

use or consumption of different items in the State. These taxes consist of the sales and use tax,

the auto rental tax, the cigarette tax, the motor fuel tax, alcoholic beverage taxes, the highway

use tax and the MTA taxicab surcharge. Some of these taxes are only deposited to the General

Fund; some are deposited only to special revenue funds; while others are deposited to a

combination of funds.

9.50

10.00

10.50

11.00

11.50

12.00

12.50

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Billionsof$

Sales & Use Tax Collections

Sales and use tax collections comprise a large portion of the tax collections in this

category. Receipts from this tax are deposited into the General Fund, a Special Revenue fund

(the Metropolitan Transportation Operating Account), and a debt service fund (the Local

Government Assistance Tax Fund). In SFY 2010-11, General Fund receipts are estimated to

increase by 8.5 percent, to $8.04 bil

2011 SFC Majority Revenue Forecast Report

Documents

Transcript of 2011 SFC Majority Revenue Forecast Report